Daily Newsletter, Tuesday, 2/16/2010

Table of Contents

Market Wrap

Two In A Row

by Jim Brown

Tuesday was the second day of gains for the Dow/S&P and we have not seen back-to-back gains since Feb-2nd.

Market Stats Table

There were two bombs stimulating the market this morning and both were unexpected. The first bomb came overnight when Barclays (BCS) posted $10.45 billion in profits, $18.18 billion for the full year. This included the sale of BGI to Blackrock but it was still a blowout quarter. Those were great earnings but that was not the highlight of the report. The highlight came in comments from president Bob Diamond. He said the recovery is accelerating in the U.S. and around the world although Europe was still progressing slowly. "We see very strong signs of an accelerated recovery as we move further into 2010."

The futures exploded higher at 2:AM after the announcement was made. BCS rallied 14% in the U.S. and helped power the banking sector to a strong gain. The U.S. markets gapped open and never looked back as initial resistance was broken at the bell and shorts were forced to scramble to close positions.

The second bomb came from the EU where the Finance Ministers meeting concluded with tough talk for Greece and options for solving the liquidity problem if Greece can prove they are taking the necessary steps. One of the options discussed was an advance of future monies due Greece from the EU in order to relieve the liquidity crisis and allow Greece time to let the austerity measures work. The news prompted a huge spike in the Euro because the crisis appeared to be over or at least under control. The dollar was crushed and gave back all the gains for the past week and threatened to hit a new two week low. The crashing dollar pushed commodities sharply higher with dollar longs and commodity shorts having a really bad day.

Helping power sentiment higher was two stronger than expected economic reports. The NY Empire Manufacturing Survey spiked sharply higher to 24.9 in February from 15.9 in January. Consensus estimates were for a decline to 14.9. For the first time since August 2008 the inventory component was not negative. It was flat at zero but that was far better than the -17.3 reading in January. This suggests the inventory replenishment cycle has begun. Even more astounding 64% of the companies surveyed planned on hiring over the next 12-months. In January of 2009 only 45% planned on adding workers.

Empire Manufacturing Survey

The second unexpected economic improvement came from the NAHB Housing Market Index, which rose sharply to 27 from 15 in January. The consensus was for a flat reading at 15. This is a gain of +13.3% from January and +88.9% since February 2009. The single-family sales component rose to 17 from 15 and the six-month outlook rose to 27 from 26. Traffic remained flat at 12. Despite the relative gains this was a bullish report because January and February are not normally strong months for home sales. This boosted already excited investor sentiment at the open.

NAHB Housing Market Index Chart Survey

The dollar fell hard against the Euro and the pound. The decline against the Euro was the biggest one-day drop in a year. A JP Morgan analyst said the move in the Euro was expected because of the extremely high short interest. It only took a small uptick in sentiment to generate a major short squeeze. The analysts said JPM expects the Euro to decline to 115-120 over the next two years because of structural problems in the EU. The charts below are an exact inverse of each other and clearly shows institutional traders were long the dollar and short the Euro in large quantities.

Chart of the Euro

US Dollar Index Chart

The drop in the dollar sent commodity prices surging higher with gold surging nearly $30 and crude oil up +$3.14. Anything denominated in dollars saw a monster short squeeze including equities. Oil prices had been fighting resistance a $74 and again at $75 but today's rally on the falling dollar catapulted crude to $77 at the open. Energy stocks went along for the ride but the gains were far less spectacular. This was the biggest one-day gain for oil since September. The weekly inventory report will be delayed until Thursday morning because of the holiday.

Crude Oil Chart

Simon Property Group (SPG) offered to buy General Growth Properties (GGWPQ) for $10 billion today. SPG owns nearly 400 retail properties nationwide. Chicago based General Growth Properties, currently in bankruptcy, would see $7 billion go towards the company's creditors and the rest go to shareholders. The offer equates to roughly $9 per share and General Growth shares quickly rallied to more than $12. This suggests there could be another bidder or a raised bid.

Brookfield Asset Management (BAMA) has been buying up millions of dollars in General Growth unsecured debt and has also expressed an interest in acquiring the company. General Growth has always said it preferred to emerge from bankruptcy as a stand-alone company. Investor William Ackerman owns 25% of General Growth shares and has repeatedly said that the shares are worth between $24 and $43. Simon Properties said General Growth has refused to return calls or respond to requests to negotiate. If the acquisition were to occur Simon would own 30% of the malls in the U.S. and 60% of the class A malls.

Chart of General Growth

Norway's Yara International agreed to buy Terra Industries (TRA) for $4.1 billion in order to increase its presence in the USA. Terra had been under hostile attack by CF Industries but the company withdrew its offer for Terra last month. Terra's stock fell from $43 to $32 when the offer was withdrawn. The Yara offer roughly equates to $41.10 per share and a 23% premium over Friday's closing price. This will give Yara about 30% of the U.S. market. Most analysts expect a big year for the fertilizer sector as farmers try to replenish their fields after skipping the fertilizer in 2009 in order to save money. Everyone who owned Terra at $43 and dumped their stock at $32 when the CF offer was canceled, are kicking themselves today.

Terra Chart

Whole Foods Markets (WFMI) report earnings after the close and profits rose +79%. Whole Foods exploded after the close after raising its guidance for 2010. WFMI saw sales plunge during the recession as consumers shied away from higher priced foods. WFMI cut back on expansion plans added some lower cost products and those efforts appear to be paying off. They saw more traffic in the last quarter and sales rose +7%. Same store sales rose +3.5%. Earnings rose to 32-cents from 20-cents. Analysts were only expecting 26-cents.

Whole Foods Chart

Research in Motion co-CEO Mike Lazaridis blasted wireless carriers on Tuesday saying there was a shortage of bandwidth capacity in the U.S. and if cell phone makers did not start developing less bandwidth-guzzling applications the network was going to choke. Wireless traffic has exploded since the advent of the iPhone and the dozens of copycats that followed. Users are already suffering from slower downloads and dropped calls. AT&T is the poster child for bandwidth complaints and dropped calls because they carry the majority of the iPhone traffic.

With netbooks already gorging on bandwidth and now iPads poised to start sucking even more bandwidth with enhanced browsing and hundreds of thousands of applications the implications are clear. Smart phones consume 30 times more bandwidth than a traditional cell phone prompting network engineers to nickname iPhones as iHogs. Netbooks and portable personal computers consume 450 times the amount of bandwidth as cell phones. BlackBerrys are at least five times more efficient at email and attachment viewing and three times more efficient than other phones on Internet browsing according to RIMM. For a carrier that means three times the paying customers using a BlackBerrys in the same amount of bandwidth needed for a regular smart phone. AT&T is racing to add more bandwidth but bandwidth consumption is expanding at a faster rate than the network is increasing so access is still lousy. The wireless spectrum is relatively skinny in terms of bandwidth capabilities compared the fiber optic network once the content leaves the phone.

Chart of AT&T

The calendar for tomorrow has Hewlett Packard (HPQ) earnings and today's rally probably removed some of the coiled spring tension from the HPQ stock price. Other earnings include GENZ, MSO, CHK and PCLN. Also on Wednesday is the FOMC minutes and Industrial Production. Analysts will be looking for the fork in the road for the Fed but I don't think they will see it tomorrow.

When I wrote in the weekend commentary I felt like a breakout was imminent I did not expect +170 Dow points but when those resistance levels break the short squeeze is always good for an unexpected run. Unfortunately the breakout came on the lightest volume since January 14th with only 7.53 billion shares traded across all markets. The internals were strong with 6.5 billion shares in advancing volume and only 960 million shares declining. The A/D line was very positive with 5,180 advancers and only 1,416 decliners. Despite the good internals there is no confirmation a breakout on such low volume.

That does not mean that the rally can't continue but the pressure has been released. The relief valve let the steam out and now some new event will have to appear to move us higher. The squeeze was over done but the short-term trend is still positive.

The Dow rallied to 10268 with strong resistance at 10300. You may remember my cautions over the last couple weeks that I would not really change to a bullish bias until the Dow was over 10300 on high volume. Today was a good attempt but there needs to be some significant follow on before it will be a bullish indicator. With support just over 10,000 there is plenty of room to the downside if the market loses traction here. A breakout over 10300 would be very bullish and should trigger another wave of short covering.

Dow Chart

The S&P-500 rallied over resistance at 1085 and the 100-day average at 1092 but remains trapped below the much stronger resistance at 1100-1105. It would be very bullish if that 1100 resistance was broken. Support is now 1075-1080.

S&P-500 Chart

The Nasdaq gapped just over initial resistance at 2200 and held there most of the day until a new surge of buying appeared just before the close. The chip stocks were strong with the SOX gaining 2.5% and leading the Nasdaq higher. The big caps were not particularly strong and some closed off their highs for the day. It was mostly short covering rather than a sudden surge of interest in tech stocks other than chips. The Hewlett Packard earnings on Wednesday and Dell on Thursday will be a big factor on whether the Nasdaq can continue its climb. Strong resistance at 2225 is not likely to be broken on low volume or on the first attempt.

Nasdaq Chart

The Russell 2000 is on fire. The index surged to strong resistance at 620-623 and a breakout here would be very bullish for the broader market. I believe the buying in the small caps is a sign fund managers are becoming increasingly comfortable with the current market and the potential for it to move higher into Q1 earnings. The Russell is the only index that declined to correction levels and the rebound is going vertical.

Russell 200 Chart

In summary, the market rally was due to a very low volume short squeeze and not an overall change in sentiment. The positive motivators were the economic guidance comments from Barclays and the better than expected NY Empire Manufacturing report and the NAHB Housing Market Index. The anticipated successful resolution of the Greece debt crisis sent the Euro spiking higher and the dollar crashing. That caused commodities to rocket higher along with commodity and materials stocks. It was all event related and not a sudden overwhelming urge to buy something.

I would continue to be cautious until the Dow moves over 10,300 and S&P over 1105 on strong volume. There is always the potential for a bear trap if those indexes just peek over those levels on light volume and setup a new shorting opportunity.

Jim Brown

New Option Plays

I Have My Doubts

by James Brown

Why We Like It:
I seriously have my doubts about the duration and strength of this market rebound especially with today's lack of volume but we might as well take advantage of the short-term trend. Shares of SHLD have been building support in the $89-90 zone for days now. Today's rally produced a minor breakout from this trading range. I'm suggesting very small positions since this is an aggressive trade with a short time frame. SHLD is due to report earnings next week on Feb. 23rd and we do not want to hold over the report.

Buy calls now. Use a stop loss at $88.75, which is under Friday's low. Our first target is $97.45. Our second, very optimistic target is $102.00.

In Play Updates and Reviews

Rebound Continues As Expected

by James Brown

Our new play on AZO is off to a strong start. Shares gapped open higher at $161.32 and quickly hit our trigger at $161.75. Our call play (March $165 calls) was triggered with the calls at $4.40 this morning. Sadly that is more expensive than I expected for our entry point since these calls closed at $3.00 on Friday. If you missed the entry point this morning consider waiting for a dip. Broken resistance in the $160-161.50 zone should be new support. FYI: Strong volume on today's rally is a good sign.

Our first target to take profits is at $167.50. I am adding a second, more aggressive target at $174.00 but that will require AZO to break through resistance in the $170 region.

Euro strength and dollar weakness fueled big gains for anything related to commodities. FCX gapped open higher at $75.62 but unfortunately spent the rest of the day churning sideways. The 50-dma has declined to $77.99 and the 100-dma is at $77.80. I am adjusting our second and final exit target down from $77.50 to $77.25. More aggressive traders may want to aim higher. I'm also moving our stop loss higher to $71.95.

The bounce continues for shares of WYNN but the stock is still struggling with resistance near $65.00. I don't see any changes from my weekend comments. We want to use a trigger to buy calls at $65.51. If triggered at $65.51 our target is $71.90, just under the January highs. This is definitely an aggressive play with a short-term time frame and a volatile sector.

Don't forget that WYNN could be heavily influenced by LVS' earnings report on Feb. 17th.

Commodity strength also fueled a rally for the steel makers. Shares of X gapped open at $49.23 (ouch) but kept rising to close with a 6.5% gain. I've adjusted our entry point and I'm also raising our stop loss to $44.95. Our first target to take profits is still $51.75. Our second target is $54.00. FYI: Thank goodness the option price didn't gap open too high. Our entry point is now $2.77 on the March $50 calls.

The market strength is giving AAPL a boost with shares climbing 1.5% and closing above technical resistance at the 50-dma. Right now would be a good time to reconsider your risk tolerance. We were expecting a bounce and AAPL delivered a bounce. The question is does the bounce fail and where will it fail? AAPL should have resistance near $205 and there is also resistance near the $207.50 region. We knew this was going to be somewhat volatile and an aggressive trade so we left our stop loss wide. More conservative traders may want to consider an early exit or a tighter stop loss. I am not suggesting new positions at this time.

Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. The plan was to use small positions to limit our risk.

Chart:

Entry on January 28 at $201.08 (small positions)/gap open entry
Change since picked: + 2.32
Earnings Date 01/25/10 (confirmed)
Average Daily Volume = 26 million
Listed on January 28, 2010

Abbott Labs - ABT - close: 54.59 change: +0.66 stop: 55.05

Our bearish play in ABT may be in trouble. Today's rally lifted ABT above technical resistance at its 50-dma (in addition to its 21, 30, and 40-dma). Shares look poised to test the $55.00 level soon. If the market sees any follow through higher on Wednesday I would expect ABT to hit our stop loss.

Our first target was $50.15. More aggressive traders can target the 200-dma or support near $48.00.

European banking giant Barclays reported earnings this morning that were much stronger than anticipated and the news lifted the entire banking sector. Shares of BEN gapped open higher at $98.64 but merely traded sideways until late in the session. I have cautioned readers to look for possible resistance at $100 and its 50-dma (near $104.82).
I'm not suggesting new bearish positions at this time. Our target to exit is $93.50.

Please note that if you have the February $95 puts I am moving the stop loss down to $100.26. We could get stopped out tomorrow.

Uh-oh! We were expecting a bounce in GD this week but today's rebound appears to have broken the short-term trend of lower highs. GD should still have resistance at $70.00 but a close over $70.00 would too bullish and I would consider an early exit if we don't get stopped out at $70.55 on an intraday basis.
Our official exit target is $62.60.

GS appears to have broken out from the very short-term consolidation but the stock is still trading inside its larger $150-160 trading range. We are still sitting on the sidelines since our trigger to buy puts is at $147.45. More nimble traders may want to consider a failed rally at the 50-dma/200-dma as a possible entry point.
If triggered our first target to take profits is at $138.00.

Entry on February xx at $ xx.xx

Gymboree - GYMB - close: 41.89 change: +0.13 stop: 42.26

I am ready to call it quits on GYMB but it looks like it's too late. Our Feb. $40 put has dwindled to nothing. Unfortunately odds are very high that we're going to get stopped out at $42.26 in the next day or two. No new positions at this time.

IBM is bouncing just as we expected. Shares broke through short-term resistance at $124 and they're headed for technical resistance at the 100-dma and the 50-dma. The 50-dma is currently at $128.00. I'm expecting IBM to struggle at this level, which is why our trigger to buy puts is at $127.00. More conservative traders may want to wait for a failed rally pattern first before launching positions. Please note I'm lowering our stop loss to $130.51. If triggered at $127.00 our first target is $122.00. Our second target is the 200-dma.

Entry on February xx at $ xx.xx

JPMorgan Chase - JPM - close: 40.07 change: +1.12 stop: 41.65

The Barclays earnings news this morning fueled a strong rally for the banking sector. Shares of JPM gained 2.8% and managed to close just above round-number resistance at $40.00. Yet shares remain under their 200-dma. I would expect further resistance at the 50-dma near $41.20. Wait for the rebound to fail before considering new bearish positions.
Our first target to take profits is at $35.25. Our second target is $32.00.

The rebound in MCK produced a 1.5% move but shares struggled with resistance near $60.00. I'm suggesting readers wait for a failed rally near its 50-dma (currently near $61.45) before launching new positions. Our first target to take profits will be $54.00.

MHS is still inching higher and posted a 1.5% gain on Tuesday. I'm suggesting readers look for resistance near $64.00 and its 50-dma (near 63.65). Wait for the rally to fail before launching new positions.
Our first target is $57.50.

The RLX retail index displayed strength today with a breakout over the 400 level and a breakout over its trend of lower highs. Although it's worth noting the rally did stall at its 50-dma. The RTH followed retail higher with a 1.4% gain and a close over its 100-dma. The RTH hit $93.02 this afternoon and over the weekend I suggested readers use a bounce or failed rally near $93 as a new entry point.
Our first target is the $87.00 level. The 200-dma will probably be support. The RTH moves kind of slow so make sure you use an option that gives you enough time.

Entry on January 23 at $ 91.42
Change since picked: + 1.41
Earnings Date --/--/--
Average Daily Volume = 1.7 million
Listed on January 23, 2010

SIEMENS - SI - close: 87.27 change: +2.21 stop: 92.05

Strength in the European markets fueled a 2.5% gain for SI. The stock managed to erase Friday's losses. Shares are somewhat oversold and could easily see a bounce back toward $90.00 or its 50-dma at $91.50. I strongly suggest that more conservative traders exit early now. I am not suggesting new positions at this time. SI has already hit our first target at $87.55. Our second and final target is $81.00.

The rebound in shares of UTX seemed to under perform the rest of the market. The stock has resistance near $67.00 and again near $68.50. Wait for a new failed rally pattern before launching new positions. Our target to take profits is $61.00 near the rising 200-dma.

The market's rally fueled a big move in INFY. The stock gapped open higher above its 50-dma and hit our stop loss at $55.15 closing this trade. More nimble traders may want to look for a dip and consider aiming for the January highs near $59.00.